Rs 4.8 lakh crore — That's the sum of loans, which are likely to turn bad due to the Covid-induced economic slowdown. But this is only a first estimate with revisions expected during the course of the fiscal year. The fresh lot of bad loans comes just when banks have completed the NPA clean-up exercise but are now staring at another incoming heap, which could dent their capital levels and profitability.
As per the RBI's Financial Stability Report released last Friday, FY21 gross NPAs may increase to 12.5 per cent in a baseline scenario from 8.5 per cent in FY20. Assuming a credit growth of 6 per cent this fiscal much like the previous year, total advances may reach approximately Rs 110 lakh crore, which means in absolute numbers gross bad loans will likely be around Rs 13.5 lakh crore, up from Rs 8.8 lakh crore in FY20 translating to Rs 4.8 lakh crore fresh slippages. But if the macroeconomic environment worsens, and under the very stressed scenario, bad loans could be as high as 14.7 per cent to over Rs 16 lakh crore.
Thus slippages in FY21 will be about Rs 7 lakh crore. "If loan moratorium isn't extended beyond August and loan restructuring doesn't happen, then loan accounts in SMA-2 (those over 60 days past due) will be at the risk of becoming NPAs during the September quarter," said Anil Gupta, Sector Head — Financial Sector Ratings, ICRA Ratings. Gupta added that if the RBI was projecting a 4 per cent increase in gross NPAs, one can presume that the loan moratorium is unlikely to be prolonged beyond August as further extension will imply a delay in bad loans classification by another quarter or two. Given that the impact of moratorium is uncertain and evolving, how it plays out on the quality of banking assets is difficult to ascertain accurately.
As per estimates, incremental bank credit in FY21 will be around Rs 6-7 lakh crore translating to 5.8-6.8 per cent increase over FY20. In March, RBI allowed loan moratorium for three months and later extended it till August. In April, the central bank also extended the 90-day NPA norm to 180 days for accounts under moratorium. However, the central bank has tightened provisioning rules.